Outlook 2025: traversing the semiconductor cycle

Investing in the semiconductor industry can be quite complex. It is, in fact, a very technical industry from a technology perspective, and the prospects of the companies within the industry are influenced by multiple factors such as the execution of their innovation roadmap, the structural and cyclical health of the addressed end markets, and more recently, by geopolitics. In recent months, the debate in the market has centred around the state of the cycle and whether we have already passed the peak. Here’s our perspective on the outlook for the industry.

Structurally speaking, we believe it is worth making the effort to understand all these moving parts, as the semiconductor industry grows faster than the global economy through the cycles. This superior growth profile is driven by the ever-increasing chip content in the devices that permeate our daily lives. Without semiconductors, there would be no smartphones, no PCs, or even cars. We think it is not exaggerated to say that semiconductors represent the backbone of our modern society.

However, this industry is characterised by its cyclical nature, as manufacturing capacity addition takes a long time to come to the market, creating regular mismatches between the demand and supply of semiconductors. The stock prices of semiconductor companies are closely linked to these cyclical fluctuations, as can be seen on the chart below. Understanding where we are in the cycle is therefore crucial for making informed short-term investment decisions.

Semiconductor revenue growth versus market value changes (year-over-year)

Source: Company reports, Factset, DPAM; 2024

At present, the data collected by the Semiconductor Industry Association continue to indicate that the growth of the sector is in positive territory and that we are in the growth acceleration phase of the cycle. Historically, this stage can be characterised as the mid-part of the cycle and has been favourable for the performance of semiconductor stocks. Despite still being in the revenue growth acceleration phase, the market value of these companies, as represented by the SOX equally weighted index, has already peaked and is now more than 20% below its early summer high. This apparent contradiction raises important questions for investors. Why is the market pulling back when indicators suggest we should be in a bullish phase? Part of the answer lies in concerns regarding the breadth of the cyclical recovery we have seen so far.

Up until now, the current cycle has been largely propelled by the growth of AI. This trend is evident in the data centre revenue profiles of companies like Nvidia, as well as in the sales figures of DRAM memory manufacturers. The explosion of AI technologies, and more specifically Generative AI, has driven an intensive demand for high-performance and power-efficient computing chips, as well as high-performance memory chips.

Meanwhile, outside of AI, the mainstream segments of the market—such as smartphones, personal computers, industrial equipment, and automotive applications—are only just beginning to recover. The automotive sector, in particular, is still grappling with an inventory correction. The recovery has been slower than companies had anticipated, but it remains underway, in our opinion. The anticipated increase in the volume of smartphones and PCs, combined with the additional boost from higher semiconductor content per device for edge AI applications, is expected to sustain the industry cycle into 2025, provided that investment in Gen AI infrastructure by the cloud providers doesn't decline—a scenario that is not currently the base case.

Since the summer, the market has been grappling with concerns about the sustainability of the cycle. These worries, coupled with a weaker outlook for Chinese semiconductor equipment spending—partly due to risks associated with export restrictions—and some operational challenges at industry giants like Intel and Samsung, have caused a derating of the companies specialising in semiconductor capital equipment relative to the market. As we look ahead to a probable rebound in equipment spending in 2025, these firms may present compelling opportunities for investors.

Circling back from the cyclical to the structural discussion, these semiconductor equipment companies benefit from a very attractive asset-light business model, a compelling oligopolistic market structure, as well as from the ever-increasing complexity of manufacturing semiconductors at the leading edge, supporting their strongly profitable growth outlook.